Farm Fuels in Focus: Farm Diesel in 2016

December 22, 2015 04:39 PM

 

  • LP is 2 cents higher on the week at $1.06 per gallon.
  • January 2015 natural gas opened today at $1.92 -- up 10 cents from our last Fuels in Focus.
  • Farm Diesel is 10 cents lower on the week at an average of $1.86 per gallon.
  • February2016 WTI crude oil opened the day at $35.80 -- unchanged from our last report.
  • January 2015 Heating oil futures opened the day at $1.09 -- 3 cents lower than our last report.

Farm Diesel -- I got a question in from a Market Rally Radio listener for our Thursday show regarding farm diesel in 2016. The question was simply, "What's diesel going to do in 2016?" Behind the simplicity of a question like that are dollars and cents that have to be spent and since the outlook for the ag sector in general isn't the strongest, margins will be tight. I believe the question on his mind is actually, should I pull the trigger on my 2016 diesel before the end of the year. There are a few ways to look at this.

If we start at the transport sector's expectations for fuel expenditures, we see clear signs that airlines and railroads already have low fuel costs figured into their outlook for shareholder returns. Airlines are already posting record profits based on wide margins thanks to dramatically lower fuel costs. According to the International Air Transport Association, the airline industry is expected to report $33 billion in net profits for 2015. That compares to $17.4 billion in 2014. Firmer demand for seats on flights have helped, but the main reason profits have swelled 89.6 percent for airlines is cheap fuel.

12222015DieselRailroads are not as easy to figure since higher crude oil prices would set off a round of production increases, and in turn, support higher demand for rail transport of crude oil and increased fuel surcharges to customers. Rail companies are suffering a bit from weak demand for transport of oil from shale operations, coal and agricultural commodities, but diesel costs are pointed to as a positive for rail outfits in 2016. Ocean freight and trucking outfits have also noted low fuel prices as weighing on fuel costs, although profit margins have struggled as demand for transport in general declined in 2015. Their outlooks, like the airline industry, call for at least steady fuel costs in 2016, with a bearish bias.

The word from EIA is that global distillate refining over the summer was very high as demand for distillate fuels fell. That led to very healthy global stocks of distillates like heating oil and diesel fuel. Currently, U.S. distillate stocks are the highest the have been since October 2011. That will limit near-term strength in farm diesel. EIA notes,"Unless severely cold temperatures in the Northeast coincide with severely cold temperatures in Europe , ample supplies should be available to meet demand." EIA does believe U.S. crude oil production will fall from 2015's daily average output of 9.2 million barrels per day to 8.8 million barrels per day. A cut like that could cause a quick round of short covering at the first report, but OPEC is also expected to produce oil at a rate of nearly 32 million barrels per day. That's above the initial 30 million barrel per day production cap. Even if U.S. crude production slips, global production will reamin elevated, and limit support for refined petroleum products.

I wrote last week that it may take some sort of black swan event to firm crude oil, heating oil and global fuels prices, including farm diesel. Bear in mind that Russia derives a great deal of its GDP from oil sales. In this low price environment, with international tensions running hot, an escalation of war could mean firmer fuels prices as large scale wars have always profited oil producers. I would look for a Russian attack on Turkey to be a major factor in escalating powers toward war. A major offensive into Turkey would likely draw allied nations together against Putin's intrusion, although his takeover of the Crimean Peninsula garnered limited military attention from the world community.

Many believe the crude oil market is oversold which may limit downside potential near-term. But forecasts make an equally good case for $20 per barrel oil as for $70 oil. Technical indicators suggest to crude traders that January will be a time to buy into the market as they expect seasonal trends to firm crude in February. Our own analysis of retail farm diesel over the past few years shows ruby red has bottomed around Christmas and just laid there until mid-January when prices firmed up to a late February high.

We believe the low in farm diesel will come in next week, but we do not expect prices to firm until mid-January, if at all. A couple of ways real quickly to proceed. This is gut-check time. Since prices are so far below last year's price and already would fit nicely into just about any budget, you can completely eliminate your diesel risk for the rest of winter and for spring 2016 by booking 100% of your needs on either side of the first of the year. That would be one of those times when you are certain that your local price fits into your budget. If you choose to book 100% right off the bat, take my advice and forget about diesel prices and if prices drag a few cents lower, don't beat yourself up over missing the low.

The other way to go is to book conservatively and fill 50% of your winter/spring needs around the first of the year and wait for your local market to begin higher before filling the rest. That risk is prices may spike. there is the potential for a crude oil surprise based on international tensions and crude oil's extremely oversold condition, but the global supply overhang should keep that in check -- bear in mind, crude fundamentals have often taken a backseat to the whims of traders in the past year and anything is possible. What is PROBABLE, is sideways, rangebound trade in crude. We have observed that farm diesel tends to lag sporadic crude and heating oil price movements by a week or two and that may give us time to book at the front end of a rally if prices heat up.

The long and short of it...

I expect slightly lower diesel around the first of the year; flat price action through January and a mild demand-based rally through February and into March. After that, supply fundamentals will take over and if demand for diesel for spring fieldwork is high, farm diesel will find support. Examine your appetite for risk and your production budget and book 50 to 100% of your winter/spring diesel on one side or the other of the first of the year.

  • Distillate inventories reported by EIA firmed 2.6 million barrels to 152.0 mmbbl. Stocks are currently 30.4 mmbbl above the same time last year.
  • The regionwide low currently lies at $1.54 in Missouri and the Midwest high is at $2.06 in Wisconsin.
Farm Diesel 12/22/15
Three Weeks Ago
Previous Week
Change
Current Week
 
Iowa
$1.87
$1.87
-8 cents
$1.79
Iowa
Illinois
$2.02
$2.02
-20 cents
$1.82
Illinois
Indiana
$2.25
$2.02
-3 cents
$1.99
Indiana
Wisconsin
$2.14
$2.06
8 cents
$2.14
Wisconsin
Minnesota
$1.95
$1.92
1 cent
$1.93
Minnesota
South Dakota
$1.88
$1.84
Unchanged
$1.84
South Dakota
North Dakota
$1.98
$1.90
Unchanged
$1.90
North Dakota
Nebraska
$1.83
$1.83
Unchanged
$1.83
Nebraska
Missouri
$1.83
$1.54
Unchanged
$1.54
Missouri
Kansas
$1.81
$1.81
-17 cents
$1.64
Kansas
Ohio
$2.04
$1.69
Unchanged
$1.69
Ohio
Michigan
$1.87
$1.80
-15 cents
$1.65
Michigan
Midwest Average
$1.96
$1.86
-5 cents
$1.81
Midwest Average

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Propane -- Very little change on the propane side. We are 2 cents higher this week to $1.06 per gallon regionally. Since heating oil futures are so bearish, we may see propane follow that trend and dip back below $1.00 per gallon, but export activity will likely be a supportive factor. Warmer temperatures of course have taken a bite out of demand and consumption, leaving many with plenty of propane for what remains of the winter. If it actually turns out anybody needs to refill next summer, prices appear to be set to come in lower than the June/July 2015 seasonal low.

  • According to EIA, last week, national propane inventories fell 1.683 million barrels -- now 20.587 million barrels above the same time last year at 98.975 million barrels.
  • The regionwide low is at $0.88 per gallon in Nebraska and the regionwide high is in Indiana at $1.39.
LP 12/22/15
Three Weeks Ago
Previous Week
Change
Current Week
 
Iowa
$0.98
$0.97
Unchanged
$0.97
Iowa
Illinois
$1.29
$1.29
Unchanged
$1.29
Illinois
Indiana
$1.32
$1.39
Unchanged
$1.39
Indiana
Wisconsin
$1.18
$1.18
Unchanged
$1.18
Wisconsin
Minnesota
$1.01
$1.00
15 cents
$1.15
Minnesota
South Dakota
$0.89
$0.89
Unchanged
$0.89
South Dakota
North Dakota
$0.93
$0.93
Unchanged
$0.93
North Dakota
Nebraska
$0.87
$0.88
1 cent
$0.89
Nebraska
Missouri
$1.14
$1.16
Unchanged
$1.16
Missouri
Kansas
$0.92
$0.92
2 cents
$0.94
Kansas
Ohio
$0.89
$0.89
6 cents
$0.95
Ohio
Michigan
$0.96
$0.96
2 cents
$0.98
Michigan
Midwest Average
$1.03
$1.04
2 cents
$1.06
Midwest Average

 

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